REACT Group PLC (REAT) Earnings Call Transcript & Summary

REACT Group, the leading specialist cleaning and soft facilities management services provider has announced auditory results for the year ended 30th of September 2024. Joining me today to discuss the update is REACT Chairman, Mark Braund. Mark, good morning to you.

Good morning.

Mark, you've released final results for the year ended 30th of September 2024 today. Could you just talk us through the financial highlights?

Yes. It's a very robust performance by the team, especially when you compare it against what was a phenomenally strong year the year before. We've been very mindful of the sort of economic backdrop that we've been operating in, especially in the sort of second half of the year. But nonetheless, the team have grown the business. We've taken market share in our opinion. We've delivered growth of just over 6%, all of which is organic to bring revenues up close to GBP 21 million. We have recorded 87% of our business being recurring, which continues the performance of improving the nature or the financial profile of our business. We generated GBP 2.4 million of EBITDA which is up again just over 6% year-on-year on a very strong year last year and follows a year of actually investing in growing the business. And pretty importantly, we continue to drive cash. We have free cash flow of GBP 2.3 million. So a very strong outturn in our opinion of -- for a year, which has been tried and tested by various external headwinds. But I would like to add, and I think this is quite important, that pretty much since we started 5 years ago, we've faced external challenges. First, it was COVID, then it was the Ukraine war, then the cost of living crisis, then war in the Middle East and now more recently, the impact of changes in government policies. So we have got a fighting fit mentality. We are very resilient. And once again, 5 years on the trough, we've delivered what I think is a strong performance and one that has been market-leading.

It is a good set of numbers. You mentioned earlier the strong level of recurring revenue. Could you just talk us through how each division has performed?

Yes. I mean our focus is always on trying to expand that recurring revenue. Now I think we're at a point really where our recurring revenue is going to move between 80% -- sorry, 75% and 90%. And the reason I say that is that there is a demand for some of the services we deliver on a one-off or project basis, and it generates high margin. It also generates great customer engagement because we're typically dealing with a one-off incident or a one-off problem that the customer needs urgent relief on. So that will continue. And as we get bigger, there will be potentially more of that. But the underlying organic -- sorry, the underlying recurring revenue will always be strong. We're looking for it to be -- for our business to be greater than 75% and ideally above 80%. As you look around each of the divisions, we have one division, that's our window cleaning business, which is 100% recurring revenue. It's contracted, typically long term, and that's 100% recurring revenue. If we look at our soft FM services business in the Midlands, Fidelis, that's about 90% recurring revenue. They do have some project work and some ad hoc work but 90% of that is recurring. Again, very long contracts, anywhere between 3 and 7 years. So the profile of those 2 businesses is strong and they continue to be strong. The reactive business, which is our specialist cleaning business, that by its very nature, is more project or incident related. Now a large part of that is still recurring. We have some hospital contracts, which basically we are in every day of the week doing deep cleaning, a bit like the fourth bridge, you start at the beginning, get to the end and then you got to start all over again. So we have recurring revenue there, but it's not as high in proportion as the others. That's been performing well, but we have been seeing some high growth in incident responses. So the project-related work with higher margin has certainly become a strong feature in that business of late. And then we move to the recent acquisition, which is not relevant to these figures because we made the acquisition post period. But that business in Aquaflow is about 50% to 60% recurring or reoccurring in business. About 20% on top of that is reoccurring where they're responding to incidents, but they've got a contract that you can pretty much trend. And then the remainder is pure responses to incidences. So all in all, well balanced, brings about the blend that we've just been talking about, and they've all performed extremely well in the last 12 months.

Indeed. And it's great to see multiple contract wins awarded through cross-selling alongside a steady stream of new customer wins. But could you just expand on this for us and tell us what that means for the group?

Yes. Well, look, we have -- from almost day 1, and you've got to look at the team and specifically the CEO, Shaun is an exceptionally strong sales and marketing leader, and he's built a very strong process, which we apply every time we acquire a business. It helps them grow. So it's all about upselling within our customers and also winning new logo or new customers. So that's been a success for the last 4 or 5 years and was last year. But the key opportunity from an investment point of view is investing in cross-selling. That is take the customers that we've got within Fidelis and selling them our reactive services or our window cleaning. Take the new acquisition of Aquaflow. They've got a number of customers that we've not sold to before that are now buying some of our services, specifically the reactive services. And that looks to be a strong position going forward. So at the end of the day, I do think people look out for big wins that we announced through RNS. But we are a specialist business that focuses on high-value services that deliver good high-value margins. Most of that work is fragmented and in the middle of the market, meaning there aren't big -- always big announcements to make. And when there are, we'll make them. But the cadence of work coming through is small and medium-sized good margins. You've seen a margin uplift last year, which I think is a pointer to the fact that we continue to add more value to our customers. Our margins are up 80 basis points to nearly 28%, which is a good improvement considering the backdrop that we have economically. And so net-net, this sort of strong cadence of winning new contracts that are either upsell or cross-sell within our existing customer base is what's given us the strength in terms of growth over the last 12 months, and I'm certain we will continue to be so in the next 12 months.

Indeed. You mentioned earlier the post period acquisition of 24-hour Aquaflow. How is that progressing now? Sounds good.

Yes. I mean we could not be happier. I mean they're a great team. They've got a terrific business, very, very strong customer relationships, as I say, with customers that the group has -- many of which the group has not done business with before. And we're integrating well. They've got some processes that we think are better than ours. So we're cross-fertilizing and taking some synergies there. And literally, within the first few days of the acquisition, they had REACT on site, helping them clean up one of their drainage projects. So that's going very well. I couldn't be happier.

Great. I said in the RNS, a positive outlook for the business. What can investors expect from REACT in the coming months?

Well, we're really upbeat about the future, but we cannot underestimate some of the unpredictability that is there that's been seeded by recent government policy and what's going on in the sort of broader context of economics. As I said earlier, we have a management team that's lived through quite significant challenges over the last 4 years and come out good. We are fighting fit as a team. So we remain upbeat because we have a great service. We've got some great people. I think our value proposition is extremely strong. It's unique in a number of areas and customers need our services. Most of the services we deliver are nondiscretionary. If you get a flood or you get an incident on the railway or in a hospital, it's got to be dealt with. So we are upbeat that we've got a proposition that's growing in strength and value. But we do recognize that there are some external pressures that not of our doing that have become intensified actually just after the acquisition of Aquaflow through the budget that I think the impact of those is still unpredicted. The NII changes don't come in until April, and everybody is planning for it. Perhaps there's a bit more fair uncertainty and doubt than there needs to be. But we're just mindful of that. But overall, we're upbeat because we have a great product. We have a great financial model. Please remember, 87% recurring, highly cash generative. And we feel very, very positive about our future in the backdrop of what is a fairly challenging environment.

Of course. Great. Okay. Talking to me today was Mark Braund, Chairman at REACT Group, Mark. Thanks for joining directors, talk today.

Thank you, Charles. Bye-bye.